Scandinavian Working Papers in Economics

HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

No 2001:2: Politicians and soft budget constraints

Dag Morten Dalen (), Espen R. Moen and Christian Riis
Additional contact information
Dag Morten Dalen: BI Norwegian School of Management, Postal: Nydalsveien 37, N-0484 Oslo, Norway
Espen R. Moen: BI Norwegian School of Management, Postal: Norway
Christian Riis: BI Norwegian School of Management, Postal: Norway

Abstract: We study soft budget constraints from the perspective of political economics. A partly partisan government confronts a budget crisis in a politically important sector, e.g. like the health care sector. To what extent the government wants to make additional grants to the sector depends on economic conditions and on the preferences of the government, both unknown to the electorate. Thus, the government’s budget response gives a signal of its preferences, and may thereby influence the probability that the government is re-elected. As a result, the handeling of a budget crisis becomes inefficient even from an ex post point of view, in the sense that it does not react adequately to changing economic conditions.

Keywords: Political economics; budget constraints; budget crisis

JEL-codes: I18

17 pages, June 30, 2009

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